Looking back at forward-looking monetary policy

Abstract

One explanation for accommodative monetary policy in the 1970s is that the Federal Reserve responded less aggressively to inflation. Using real-time estimates of future inflation, I estimate Taylor rule type reaction functions for monetary policy. Contrary to results that rely on final, revised data, I show that the FOMC’s intended response to inflation was similar during both periods. Policy may have turned out to be accommodative largely because of the FOMC’s difficulty in forecasting inflation or because the Federal Reserve’s inflation target was higher in the 1970s, but not because they responded less aggressively to inflation.